Solving the problem of liquidity in decentralized prediction markets by sharing the risks and benefits of liquidity provision amongst many people, like in Uniswap.
Currently prediction market pools on PlotX are created using an on-chain AMM model; however, providing liquidity in the market pools is not decentralized, and the amount of liquidity per market is limited.
To delimit the liquidity that can be added in PlotX markets, it is important that we decentralize the role of “Market Creation” and allow users to become “Liquidity Providers” on PlotX markets by way of pooling assets. This takes the app one step closer to community ownership and thus, complete decentralization.
PlotX protocol allows for creation of recurring prediction markets, thanks to the AMM model. The current AMM model involves putting forth the initial liquidity required for each market that is created.
To increase market liquidity and to make this process more efficient, transparent, and inclusive, we are attempting to decentralize the process of market creation, which, if done successfully, will solve prediction markets’ classic liquidity problem.
Decentralizing market making in prediction markets means having a bunch of people pool their assets in an AMM pool, and then have that AMM pool create markets. In case of PlotX, these markets will be created cyclically and the initial liquidity required for each of those markets will come out of that AMM pool.
In return, the AMM pool will get all the benefits that come with market creation on PlotX, which will then be shared among all the people who put liquidity into the pool.
This creates a system where the risks as well as the benefits of market creation are shared among many people thereby aligning incentives.
If the benefits overweigh the risks, then the AMM pool will be able to make profit consistently which will then be shared among all the people who own a share in that pool. This way all the key stakeholders win:
- The market creators win as they are able to stake their PLOT and earn a dynamic APY on their deposits, without actively predicting. This is more like “single-sided staking”;
- The market participants win as the markets they participate in now always have sufficient liquidity to facilitate consistent ROI for a larger number and amount of predictions;
- And the protocol wins as a result of the above two.
PlotX has an AMM algorithm that creates and settles crypto focussed prediction markets on Polygon in a cyclic, automatic, and decentralized manner. The AMM also provides the initial liquidity to every market it creates.
In exchange for creating all the markets, the AMM gets:
- 40% of the prediction fees from all predictions made in that market;
- One option is bound to win, hence, the AMM also gets back ⅓ of the initial liquidity it provided + whatever reward that winning prediction wins from the market;
- And starting now, 5% of the total reward pool. This has been added to balance the risk/reward ratio of the market creator and can be adjusted going forward as the protocol adapts to real-life simulations of the risk/reward ratio.
To source the initial liquidity for every cyclic market on PlotX, we are introducing pools where users can deposit their assets and provide liquidity to the AMM. In exchange for providing this liquidity, every user will get a share of the above-mentioned rewards in accordance with their pool share.
The performance of the pool and the subsequent APY that it would provide to its participants is largely dependent on market participation.
Coincidentally, the pool will also result in higher base liquidity in markets which would, in turn, result in an increase in the ROI for participating in markets.
To ensure this hypothesis holds true in practice, we are initiating a closed pilot of the pooled staking program from 9th July.
The community would not be able to access the pools during this period, but they should see higher base liquidity in the markets they participate in.
The closed pilot should provide sufficient data to make the feature efficient enough to open it to the community.
While in the immediate term, the pool will only consist of PLOT, in future we plan to open it up to other assets as well.
That would enable holders of other assets to stake their funds on PlotX and hence provide the initial liquidity for PlotX prediction markets. This, in turn, would result in users earning different assets from their winning predictions.
Thoughts, comments, or feedback? I’d like to hear them